Noncompete clauses enforceable, courts in Illinois and Indiana rule

Physicians who believe they can evade noncompete clauses in their employment contracts may have to think again. A pair of court rulings in Illinois and Indiana affirmed their enforceability in those jurisdictions.

The decisions put the two Midwestern states among a majority that have case law or statutes upholding reasonable contracts. Six states -- California, Colorado, Delaware, Massachusetts, Tennessee and Texas -- are known to outlaw or significantly restrict noncompete clauses.

In a 6-1 decision, the Illinois Supreme Court ruled that restrictive covenants protect the business interests of established physicians and encourage them to take on younger, inexperienced doctors. "Accordingly, restrictive covenants can have a positive impact on patient care," states the December 2006 high court opinion, the first to address the issue in about 40 years.

Cardiologists Jyoti B. Mohanty, MD, and Raghu Ramadurai, MD, sued St. John Heart Clinic SC in Chicago, asking the court to declare their, and all, noncompete agreements against public policy. The physicians argued the clauses interfere with patients' freedom to choose a doctor and maintain a relationship.

The cardiologists left the clinic in 2003 and continued to practice in the area. But Dr. Ramadurai's contract prohibited him from working within two miles of any clinic office or the four hospitals they served; Dr. Mohanty had a five-year, five-mile limitation.

The Supreme Court found the contracts reasonable and unlikely to seriously diminish the number of cardiologists available to provide necessary medical services. In their decision, justices considered American Medical Association policy, which states that "covenants not to compete restrict competition, disrupt continuity of care, and potentially deprive the public of medical services." The AMA discourages any agreement that restricts the right of a physician to practice medicine and considers noncompete clauses unethical if they are excessive in scope.

The court found itself "ill-equipped" to foresee the consequences of altogether banning reasonable covenants among physicians, and said the decision was better left to the Legislature, "where the competing interests can be fully aired."

Edward T. Joyce, Drs. Mohanty and Ramadurai's attorney, said he agreed with the dissenting opinion, which said the majority gave "short shrift" to the essential issue of patient care.

"Business considerations should never preempt patient care," Joyce said, adding that Dr. Mohanty left Illinois to practice elsewhere. He said both doctors primarily treated low-income, minority patients, "so the idea that there are enough specialists to treat them is ridiculous."

Diane M. Kehl, a lawyer for the heart clinic, said the practice's owner took on the two specialists before they were board certified, established them and got them on staff at several major hospitals. Without restrictive covenants, "how likely is it that physicians would do this and help doctors become better doctors?"

An Indiana appeals court in January, meanwhile, upheld noncompete agreements there.

Central Indiana Podiatry PC in 2005 fired podiatrist Kenneth J. Krueger, DPM.

After Dr, Krueger joined a nearby competitor and informed his patients that he had moved, the group sued him for violating his contract that prohibited him from working, for two years, in any of the eight counties where CIP had offices.

Although the restrictions covered a significant portion of Indiana, judges found them acceptable because CIP had local offices and drew its patient base from those areas.

Relying on a 1983 Indiana Supreme Court decision, the last time the state high court addressed the issue, the appeals court concluded that there were no public policy concerns that superseded doctors' contract rights.

Another key consideration by the court, noted James A. Knauer, CIP's attorney, was a contract provision stating that if the scope was determined to be too broad, the court could reduce it to an area or length of time that would be enforceable.

But Joseph J. Reiswerg, Dr. Krueger's attorney, said the contract went too far -- encompassing 40 counties with nearly 48% of the state's population -- and could dramatically impact the podiatrist's livelihood. "All of [Dr. Krueger's] ties are here, his family is here, and it's very difficult for him to move out into one of the nonprohibited areas," Reiswerg said.

He added that the court ignored the effect restrictive covenants can have on patient care and is asking judges to reconsider their decision. If they decline, Dr. Krueger plans to petition the Indiana Supreme Court.

So what should doctors do when they get to the negotiating table?

On the group side, employers drafting a contract should make sure the limitations are reasonable and reflect the practice, or they risk the contract not being upheld, said Richard H. Sanders, a lawyer for St. John Heart Clinic in Illinois.

"They shouldn't just take something off the shelf and need some rational basis for showing where their patients come from," he said.

Reiswerg warned that recruits signing off on a deal should take the covenants seriously, and not be shy about bargaining. "Everything is negotiable."

Some contracts renew year-to-year, he said, but doctors can ask to renegotiate the terms. Reiswerg also recommends asking for a buyout clause, instead of a restrictive covenant.